The federal government now knows what it can't do in building a national securities regulator. And this, in Canada's convoluted constitutional realm, counts as a step forward.
The Supreme Court of Canada's ruling that the Conservative government's proposed Canadian Securities Act is unconstitutional because it usurps too much provincial power is no doubt a loss for common-sense regulation of the business of buying and selling stocks and bonds.
Canada will still have 13 securities commissions for the foreseeable future. Underhanded stockbrokers will still be able to avoid bans in one province by moving a few provinces over, and sellers of securities and mutual funds will still have to go through a cumbersome registration process in multiple capitals if they want to peddle their wares in all of Canada. Harmonized regulations will still lag far behind market developments because of the need to have a baker's dozen of commissions sign off. None of this is good.
Realistically, there are few who thought that Ottawa would win full acknowledgment of a new-found power over the securities business that has been provincially regulated for decades. The long-standing interpretation of the Constitution is that licensing of professions such as stockbroking and transactions in property such as shares are provincial domain. The federal government couldn't muster strong enough arguments that the business of stocks is now so global that it should be regulated under Ottawa's broader trade mandate.
Even so, the court's ruling on the government's request for an opinion on the proposed law should end years of squabbling between supporters and opponents of a national securities regulator over who can do what under the Constitution.
What Ottawa got is a map to a securities regulator. It's going to be a longer, uglier road than the expressway the Harper government proposed with its new securities act. We may never get there, but at least we know where we're going – toward some sort of very Canadian compromise.
"The Supreme Court has said we see where there is a role for both [national and provincial regulators]and we also see a process so go build something for Canada," said Ian Russell, head of the Investment Industry Association of Canada, who said his expectation was that the court would rule that each level of government had some authority.
What the federal government did win in this ruling is the right to build a regulator that deals with anything that could cause systemic risk – the kind of financial sector issues that bring down economies. And in the years since the financial crisis that began in 2007, the value of that is abundantly clear.
That's the starting point. The rest is going to involve a whole lot of horse trading with the provinces, which now have the knowledge that Ottawa can't force the issues. Most in the financial sector were resigned to that, and while they may have hoped for an outright win for Ottawa, they are taking Thursday's ruling as a step forward.
To Finance Minister Jim Flaherty's credit, he has worked hard in recent years to get the framework for further negotiations on a national regulator, even though in political terms there are few votes to be gained on this issue.
There is a Canadian Securities Transition Office. Ten of the 13 provinces and territories have agreed to nominate representatives to the office. They are hardly united, but they are talking.
There are those that will say this ruling by the Supreme Court will just perpetuate the notion that Canada is a backward land when it comes to securities. Mr. Flaherty has railed against the current system as an embarrassment internationally.
However, the evidence doesn't back him up. An annual survey by the CFA Institute, a global organization of chartered financial analysts, consistently scores Canada's financial system as above average. The scores have been climbing.
What's really telling is that those outside Canada consistently rate the country's financial system better than those inside the country.
How Canadian is that?